Credit Worthy News

MISSOURITax credit reform is once again a subject of much debate in Missouri’s capital with the historic preservation tax credit garnering much attention. Proponents of tax reform proposals that eliminate the state HTC program cite a report stating that only 26 cents of every tax credit dollar is returned to the state treasury; opponents of reform call this report “amateurish” and not representative of the reality of the program or its positive effects on the state.

A special committee formed by Governor Eric Greitens released a report in early July calling for sweeping changes to the historic preservation tax credit program, much to the dismay of developers, bankers, and local leaders. The current tax credit covers 25 percent of the cost of rehabbing historic buildings and any changes could impact projects in large cities, particularly St. Louis, where 900 projects over the past 15 years have utilized the tax credit for a combined $3.15 billion eligible for reimbursement.

Developers argue the state tax credit makes rehabbing historic buildings possible, and without it, downtown St. Louis will have continuing blight due to abandoned historic structures. Supporters of keeping the tax credit program believe the present uncertainty will cause stagnation in the local development environment and drive investment out of the state.

MICHIGANConversely, Michigan’s former state historic preservation tax credit may be receiving new life thanks to recent proposed legislation. In early July, a bill was introduced in Michigan’s State Senate to reinstate the historic preservation tax credits that went away in 2011 under Governor Rick Snyder’s sweeping tax reform. The bill would allow individuals and companies to “credit up to 25 percent of qualified expenditures when paired with federal tax credits,” according to the legislation.

Over the 11-year period when the credits were available, tax credits leveraged almost $1.5 billion in private investment and created 36,000 jobs, according to data from the Michigan Historic Preservation Network.

ILLINOISElsewhere in the Midwest, the Illinois’ River Edge Redevelopment Zone (RERZ) Historic Tax Credit was extended with the signing of legislation by Governor Bruce Rauner on August 18th, 2017. The legislation benefits special historic zones in five cities – Aurora, East St. Louis, Elgin, Peoria, and Rockford – that were identified as in need of special incentives for economic development. This program allows for a tax credit of 25 percent of qualified rehabilitation expenses for historic projects, and since 2009 the program has mobilized $82.1 million in private investment in these communities.

A similar 25 percent HTC was proposed earlier in the year for the cities that were the sites of the Lincoln-Douglas Debates of 1858 (H.B. 3096). Municipalities that would benefit include Ottawa, Freeport, Jonesboro, Charleston, Galesburg, Quincy, and Alton. The outcome of that proposal is yet to be determined. No state historic tax credit program has yet been proposed for the Greater Chicago area.

WISCONSINGovernor Scott Walker’s 2017-2019 biennial budget is creating uncertainty for historic rehabilitation projects in Wisconsin. Included in the proposal is a $10 million annual aggregate cap for the state HTC along with added stipulations requiring applicants demonstrate that their projects create jobs and improve local economies. This type of forced competition is leading developers in smaller communities to shy away from advancing projects, anticipating fierce competition with larger projects in urban centers which routinely claim the majority of annual tax credit allocations. In 2015, Milwaukee projects alone were awarded more than $48 million in tax credits, representing over 42 percent of the state’s annual allocations. However in 2016, $58 million in credits were awarded with 70 percent of projects in communities with a population less than 100,000, proof that the economic benefits of the HTC program are helping smaller communities under the uncapped program.

This is not the first time HTC defenders fought legislation of this type. Governor Walker’s 2015-2017 budget proposed similar changes to the program but the Legislature did not agree. This year, Senate Republicans support a cap, but their proposal would increase the cap to $20 million with a project cap of $5 million and no stipulation for job creation.

The legislative environment in Washington has intensified as the Trump Administration moves past its 100th day in office. Today the House passed the American Health Care Act by vote of 217-213. If passed by the Senate, it could bring up to $1 trillion in baseline revenue, which would act as a partial offset to reducing the corporate tax rate. Overcoming this legislative hurdle, even if the legislation fails to advance in the Senate, creates new momentum in the House to tackle tax reform legislation.

In the tax reform debate, attention shifted to the Administration on April 26th after the White House released its “Core Principles” for tax reform. National Economic Council Director, Gary Cohn and Treasury Secretary, Steven Mnuchin, highlighted an aggressive cut to corporate and individual tax rates to encourage growth. Beyond “Eliminat(ing) tax breaks for special interests,” the document provides few details about how the Administration would pay for its proposed rate cuts and is silent about how it would treat specific community development credits. The text of the White House document can be found at: http://www.marketwatch.com/story/full-text-of-trump-administration-tax-reform-principles-2017-04-26

In the House and Senate, tax reform remains a critical priority. The Ways and Means Committee is continuing its lead role in developing legislative language for a tax reform bill. In late April, Republican members of the Committee participated in a retreat to find common ground on several outstanding questions that must be resolved before tax legislation moves forward. Despite calls for greater leadership by the Senate to move the tax reform process forward and strong opposition by some Republican Senators to a House-devised Border Adjustment Tax, there has been little indication the Finance Committee is working quickly to assemble its own version of comprehensive tax reform.

Since the Administration announced it had pivoted its legislative priority to tax reform, there have been many statements about when legislation would be signed into law. Details about the scope and structure of tax reform will be forthcoming, according to the Administration, but the window to complete tax reform appears to run between October 2017 and March of 2018. Many in Washington view the Administration’s statement of tax reform principles as the beginning of a negotiation process.

The Administration’s engagement presents an important opportunity to advocate for the Historic Tax Credit with the House, Senate, and the Administration. Now is the time for stakeholders to engage and make the case for the HTC with Congress and the Administration. The future of the historic tax credit in tax reform will depend on the ability of advocates, both in DC and at home, to share the value and need for this economic development incentive. Please make plans to engage your member of congress on behalf of the HTC.

to request more about how you can help advocate for HTCs in your district.

This week’s edition of The Economist magazine has an informative article about urban revitalization in St. Louis. In a city with a turbulent history of racial segregation and housing discrimination, and one The Economist calls “one of the country’s most troubled,” the article describes signs of hope in the form of Millennial in-migration and successful educational efforts in the city’s most challenged neighborhoods. At the heart of these trends the article highlights a public/private innovation district named Cortex Innovation Community being developed—and thriving—in a formerly abandoned industrial area between Washington and St. Louis Universities.

The article describes scores of biotech, medical and scientific start-ups being nurtured by business incubators and other Cortex-sponsored efforts. What the article doesn’t mention—but we know because Cortex and its joint venture partner Wexford Science + Technology are long-standing clients of our firm—is that one of the first efforts in the district was the renovation of an historic warehouse building that obtained critical project financing from federal and state historic tax credits.

In yet another example of what has been repeated hundreds of times across the country for decades, historic tax credits provided risk-capital in the early stages of a multi-year project… and served to catalyze future development in its surrounding neighborhood. We are proud to have been a part of this pioneering project.

We believe that as the new administration and Congress begin to tackle comprehensive tax reform, they would be well-advised to keep in mind the value of federal tax policy in directing capital toward certain activities widely acknowledged to be in the public interest. Republican tax reform orthodoxy in Congress—especially in the House of Representatives—holds that removing incentives from the tax code means the federal government will “stop picking winners and losers” and will allow a purer market to function on its own in choosing where capital should be directed. The reality of our history in the last half century is that widespread disinvestment in many of our cities and small towns make early investment in revitalization efforts too risky for the “pure” market to stomach without backup from government. The historic tax credit has played a vital role in revitalization efforts all over the country, and should be kept in the tax code.

Congress believes that the rehabilitation and preservation of historic structures and neighborhoods is an important national goal. Congress believes that the achievement of this goal is largely dependent upon whether private funds can be enlisted in the preservation movement.- Tax Reform Act of 1976

A new president. An energized Congress. An aggressive approach to legislative reform. We have seen these themes dominate newspapers for the past month. In addition to the new administration, much has been made about legacies – that of the outgoing president and those of presidents past that are invoked for comparison’s sake.

President Trump and the 115th United States Congress have vowed to make tax reform a priority in 2017, and those paying attention will most assuredly draw comparisons between these efforts like the Tax Reform Act of 1986 that were overseen by the Reagan administration, a popular administration by which most Republican bodies benchmark policies and platforms.

For supporters of historic tax credits, these tax reforms were the birthplace of the current federal programs. Having originally been part of the Ford administration’s Tax Reform Act of 1976, early Reagan reform included the Historic Rehabilitation Tax Credit as part of the Economic Recovery Act of 1981.

Our historic tax credits have made the preservation of our older buildings not only a matter of respect for beauty and history, but of course for economic good sense.- President Ronald Reagan, 1984

Permanent changes were made to the federal Historic Rehabilitation Tax Credit in the Tax Reform Act of 1986 (the most extensive overhaul of the federal tax system since 1913) that reduced the income-producing credit from 25 percent to 20 percent while other real estate tax benefits were cut – a testament to the program’s value that was apparent to lawmakers. Those changes remain, 31 years later, as the basis for the program in its current form.

Supporters of the federal historic tax credit are not just preservationists but also developers, investors, architects, local business owners, private citizens, government regulators, and elected officials – both Republican and Democrats. Architecture Magazine has called it a “model of governmental initiative” and the Internal Revenue Service in 2002 stated that the Historic Preservation Tax Incentives program “is the nation’s most effective Federal program to promote urban and rural revitalization and to encourage private investment in rehabilitating historic buildings.”

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The Federal Historic Rehabilitation Tax Credit | By the Numbers

Over 42,000 historic buildings have been rehabilitated

Over 2.3 million jobs have been created

Over $117 billion in private investment has stimulated local economies

On average, every $1 in federal credit yields $4 of private investment

For $23.1 billion in costs, the program has generated $28.1 billion in federal tax receipts.

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In short, the legacy and success of the Historic Rehabilitation Tax Credit is one that should be honored in upcoming tax reform. Sweeping change proposed by Speaker of the House Paul Ryan (R-WI) currently appears to eliminate altogether incentive programs like the historic tax credit. In addition, a reduction in the corporate tax rate could de-incentivize the program even if the program remained intact. While the primary goal of historic tax credits is to serve as an economic development tool, it is also as Reagan noted a matter of respect for beauty and history that is protected by an incentive that rewards good preservation.

(An argument can be made that is also a matter of sustainability. But a topic for another day.)

The Historic Tax Credit Coalition (HTCC) and MacRostie Historic Advisors are asking that historic tax credit advocates take action TODAY to contact key representatives and voice their support for the federal historic tax credit program. As outlined in the letter below from John Leith-Tetrault, Public Policy Advisor for the National Trust Community Investment Corporation (NTCIC), the time is now to act as House Republicans begin meetings on December 14 to discuss their plan for comprehensive tax reform.

Instructions for how you can reach out and an outline for your support are explained below. Thank you for your support on this important action.

This is the most important message I have ever sent to HTCC members since its inception in 2009. House Republicans are meeting next week to discuss their path forward on comprehensive tax reform, which will impact our industry’s collective bottom line in 2017.

The talk is over and the time for action is now.

Ways and Means Republicans are convening in a special meeting in Washington, D.C. on December 14-15 to try to achieve consensus on the broad parameters of tax reform. Tax staff will then finalize bill language. Intelligence we have tells us that the bill is likely to be a stripped down version of tax reform – similar to the Blue Print we have discussed – with many, if not all credits and deductions eliminated.

It isn’t hard to see that if the HTC is not in the bill, and with Senate action delayed until later in 2017, there may well be a period of industry uncertainty this spring that could negatively impact the HTC market and the timing of transactions coming out of predevelopment.

Here is what you can do, right now. There are 9 Republican Ways and Means co-sponsors of the Historic Tax Credit Improvement Act (HR 3846) listed below. In addition, we have had numerous contacts with 3 more Members, Jason Smith (MO-8), George Holding (NC-13) and Tom Rice (SC-7). If you have a project, office or client in any of these districts or states send an email to the tax staffer listed below for that Member to advocate for retention of the credit. Phone numbers are also provided. Please do so no later than Wednesday December 13.

Your message should be that you hope that your Member will speak up now for the retention and improvement of the HTC as part of a reformed tax code. Briefly outline your company’s connection to the district/state and mention at least one project that illustrates the importance of the HTC. Make it clear that “but for” the HTC, these projects cannot be done. If you have future projects that would not get done if the credit disappears, all the better. Don’t hesitate to reach out to me or Patrick for help in drafting your correspondence. Please copy Patrick Robertson at (Patrick.Robertson@fticonsulting.com) and me at (jleith@ntcic.com) on your final email and any response you receive. If you make a phone call, send us a note about what you learn.

Thanks in advance for your prompt action to save the Historic Tax Credit.